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Spitfire Capital LLC: Insights about school bus industry

Excerpts from the letters


The domestic school bus industry is growing and is in the mid-stage of its recovery. As property taxes are a key funding source for school buses, school bus shipments are correlated with the U.S. housing market. Since 2011, school bus shipments have grown at over 5% per year and are approaching the 30-year average of 30,530 shipments. Blue Bird management has projected continued industry growth given the sustained recovery in housing prices, growing student enrollment and the need to replace aged buses.

Market share

Blue Bird is increasing its market share. Based on R.L. Polk data, Blue Bird has grown market share from 23% five years ago to 30%, in part as a result of its innovative powertrain offerings. Blue Bird is the leading provider of alternative fueled school buses. The Company has over six times the number of registered propane powered buses compared with its competitors. Blue Bird is also the first OEM to offer a gasoline-powered bus, which will provide an attractive, low price alternative to customers. As a result of sustained industry growth and continued market share gains, we anticipate that Blue Bird will continue to grow its bus shipments and revenue over the coming fiscal years. We attended the STN Expo in Reno, Nevada last week and were impressed with the energy and enthusiasm expressed by Blue Bird’s dealers regarding the industry outlook and the Company’s product line.

Blue Bird generates substantial free cash flow and its business model is not capital intensive. . The Company operates with negative working capital as dealers pay for buses before suppliers are paid and capital expenditures have averaged less than one percent of revenue. Free cash flow is a key driver of shareholder value as it will support continued debt pay down and deleveraging of the balance sheet, investment in the business and return of capital to stockholders.


Based on management’s guidance of free cash flow of between $30 million and $35 million for the full year, the Company will generate between $47 million and $52 million of free cash flow in the second half ending October 1, 2016, a mere nine weeks away. Second half free cash flow represents between $1.81 and $2.00 in incremental value per share. Management signaled its confidence in the Company’s cash flow by making a $25 million prepayment on its term loan on June 30, 2016. We estimate that the Company will generate a further $98 million of free cash flow over the next two fiscal years, representing $3.80 in incremental value per share.

It should therefore come as no surprise that we believe that the Proposal dramatically undervalues the Company. At $12.80 to $13.10 per share, the Proposal represents less than seven times the consensus estimate of Fiscal 2016 Adjusted EBITDA and about six times the consensus estimate for Fiscal 2017. The Proposal provides no value to stockholders for the Company’s revenue growth or improving margins. Equally, the Proposal provides no value for the free cash flow generation outlined above.

We believe that modest assumptions regarding revenue growth, EBITDA margin and free cash flow support a near term value of between $22 and $28 per share. Our analysis is based on projected fiscal 2018 revenue of $1,056 million, representing annual growth of only 4%; adjusted EBITDA margin of 8.5%, below management’s long term objective of 10%; and cumulative free cash flow of $145 million. By the end of the 2018 fiscal year, the Company will have nearly extinguished all of its debt, thereby eliminating any balance sheet risk and creating substantial financial flexibility to further drive shareholder value through investment in the business, potential M&A, as well as distributions to shareholders in the form of dividends and stock repurchases, as appropriate. We summarize our analysis below and have attached our valuation framework as an attachment to this letter, together with slides from the Company’s presentations. If you are interested to read insights like this, we are happy to offer you a free trial.